Shane Evangelist - CEO Neil Watanabe - CFO.

Jeff Martin - ROTH Capital Partners Mitch Bartlett - Craig-Hallum.

Welcome to U.S. Auto Parts First Quarter 2015 Conference Call. On the call today from the Company are Shane Evangelist, Chief Executive Officer and Neil Watanabe, Chief Financial Officer. By now, everyone should have access to the first quarter 2015 earnings release, which went out today at approximately 04 PM Eastern Time.

If you have not received your release, it is available on the Investor Relations portion of the U.S. Auto Parts' Web site, at usautoparts.net by clicking on the U.S. Auto Parts' Investor Relations tab. This call is being webcast, and a replay will be available on the Company's Web site through May 25, 2015.

Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and speak only as of the date hereof.

We refer all of you to the Risk Factors contained in U.S. Auto Parts' Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for a more detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statement. U.S.

Auto Parts assumes no obligation to revise any forward-looking projections that may be made in today's release or call. Please note that on today's call, in addition to discussing the GAAP financial results and the outlook for the Company, the following non-GAAP financial measures will be discussed, EBITDA and adjusted EBITDA. An explanation of U.S.

Auto Parts' use of these non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in U.S. Auto Parts' press release today, which, again can be found on the Investor Relations section of the Company's Web site.

The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP and the use of such non-GAAP measures have limitations, which are detailed in the Company's press release. With that, I would now like to turn the call over to Shane Evangelist..

Thank you, and thank you all for joining the call. I’d like to start by thanking our team members at U.S. Auto Parts for their hard work and dedication to the business. Your efforts have helped U.S. Auto Parts to deliver a fourth consecutive quarter of double-digit growth. Thank you.

Before I get into specifics of the quarter, I think it’s important to note that we’re a growing e-commerce business, producing positive free cash flow from operations in an industry that is projected to double over the next five to seven years.

We believe we’re in a great position to take advantage of that market growth ahead because of our industry leading consumer reach and supply chain advantages. This business like many others has its challenges however we believe the challenges ahead of us are manageable and can be addressed with the right strategy and execution.

I will now provide some commentary on our revenue and our plans to support long-term growth and then we’ll turn the call over to our new CFO Neil Watanabe, who will go into the numbers in more detail.

Revenue for the fourth quarter was up 12% which hit two important milestones; the first is the fourth consecutive quarter of double-digit growth; second, important milestone is growth over previous quarter’s year-over-year growth, meaning in the first quarter of 2014, we had positive 4% growth and in the first quarter of 2015, this last quarter, we were up 12%.

I believe it demonstrates our ability to return to continuous year-over-year growth and anticipate this setting us up for long-term growth. Our e-commerce channel grew 10% in the quarter. And I highlight here is this was our first quarter of positive attractive growth since the second quarter of 2012 and this is encouraging.

On our last call, we discussed a bit of traffic shift during the quarter. We started the quarter up mid single-digit traffic growth and then about half way through the quarter we experienced some headwinds. Overall we finished the quarter up 1%. I believe this demonstrates that the company can generate positive traffic growth.

Our goal is to return to sustained positive visitor growth part of that sustainability is to become less dependent on our organic search traffic and shift to more increased direct to site traffic and traffic from paid marketing channels.

Specific to our strategy to create sustained increases in traffic we are focused on driving customer lifetime value or LTV of our customers. Obviously as LTV increases we would expect that profitability of our overall business to increase.

Part of another great outcome of increased LTV and that is being able to invest more in customer acquisition and marketing simply put as LTV increases our ability to invest more in marketing also increases and the drivers of LTV and the areas that we’re focused on to improve LTV are made up of; first, gross profit per unit; second, the total number of units per transaction; third, repeat purchases; and fourth, conversion.

As it relates to gross profit per unit, we continue our robust process of sourcing private label products. We ended the quarter with around 63% of our revenues generated by private label SKUs. We added over 5,000 SKUs last year and expect to do more this year.

As we mentioned in our last call, we will be investing in additional resources to ramp development of our private label SKUs. As for units per transaction, we have a number of initiatives centered around, selling a complete job to the consumer versus selling only a single part required.

Driving few purchases centers around initiatives to improve the customer experience and as we discussed on our last earnings call, this is the most significant investment area for the year.

These customer experience initiatives have the potential for faster shipping and improve the return experience and improved first call resolution for customer issues. Finally, conversion is about making it faster and easier for customers to find the right product. We have a number of initiatives focused on both ease and speed.

Most recently we converted our flagship Web sites to be fully responsive or say it differently mobile-friendly which helps with conversion. And as a side note should limit any impacts from organic search position as Google recently changed its ranking criteria to include being mobile friendly.

As we executed on all of our LTV initiatives, we expect to see an increase in LTV.

To provide some perspectives on the upside of LTV increases, we believe a $1 increase in LTV allows us to increase marketing spend by $1.2 million annually which potentially results in traffic increases by about 2.5% driving revenue up an estimated $10 million annually and adjusted EBITDA by approximately $8 million.

More importantly though, we believe the shift decreases our mix of traffic from national search which we believe less impact from future national search engine changes.

Turning back to the financials, results for the quarter, excluding AutoMD adjusted EBITDA for the quarter came in at 2.9 million, CapEx for the quarter was 2 million producing positive adjusted EBITDA less CapEx of $900,000. Looking forward let me provide you some guidance for the full year of 2015.

We continue to believe that revenue growth for 2015 will be up single-digits. We also anticipate that revenue growth in the second quarter will be the toughest comp for us for the year.

We also believe adjusted EBITDA excluding AutoMD will be slightly down to flat year-over-year as we reinvest back into the business which is expected to drive customer lifetime value positioning us for long-term growth. Finally, we believe committed CapEx excluding AutoMD will be around $6 million for the year.

Turning to our majority ownership in AutoMD. We made good progress during the quarter singing up shops and ended the quarter with approximately 2,250 shops.

We anticipate we will end the year with somewhere between 3,250 shops and 4,500 shops and we anticipate AutoMD will generate a $2.5 million loss in 2015 with $1.65 million in EBITDA and $1 million in CapEx. In closing I will reiterate what I said at the top of the call.

We are a growing e-commerce business producing positive free cash flow in an industry that is expected to double over the next five to seven years.

We believe we are in a lead position to take advantage of this market growth and then we have the right team to execute our strategy to drive customer lifetime value which we believe will shift traffic mix away from organic to customers coming directly to our Web sites as well as through more paid channels.

And with that I will now turn the call over to our new CFO, Neil Watanabe we’re excited to have Neil on the team. He’s an experienced CFO in both public and privately held companies. Neil has spent his life in retail and has experiences with the changes that come with the right mix between growth and profits and inventory management.

In the short-term Neil has been here he has already made great impacts and we expect more of that to come going forward.

Neil?.

Thank you, Shane. I wanted to share how excited I am to join the U.S. Auto Parts team. I was attracted to this opportunity because of the inflection point of the Company’s leadership position in the industry and the expectation of significant growth in this sector.

I was also very impressed with the management team’s vast experience in both the e-commerce and automotive sector which can take full advantage of the available growth opportunities. I’ve hit the ground running here and I am focused on improving the Company’s profitability and enhancing shareholder value. Good afternoon to everyone on the call.

I am going to go through our financial results for you and then I’ll touch on some of the key business initiatives that the company is focusing on to drive improved profitability.

Unless otherwise stated, reference to this quarter and comparisons to last year, refer to the consolidated 13 week period of Q1 2015 as compared to the consolidated 13 week period of Q1 2014.

Also, percentage and basis points discussed are calculated using net sales with the exception of advertising which we will be discussing and comparing to net online sales.

Additionally, unless otherwise stated, all financial data reported including and not limited to revenues, gross margin, operating expense, net income loss, excludes our AutoMD reporting segment. We have included a chart of summarized segment information in our press release detailing the base U.S. Auto Parts, AutoMD and consolidated financials.

Net sales for the first quarter of 2015 were 76.3 million compared to 68 million last year, an increase of 8.3 million or 12.3%. The majority of this growth came from our online sales channels where sales grew by 13.4% while our wholesale sales grew by 2.8%.

The quarter’s online sales increase of 8.2 million was a result of 4.4 million or 10% increase from our ecommerce site channels and a 3.5 million increase or 22.2% increase in sales from our online marketplaces.

The 4.4 million sales growth in our e-commerce sales channels were driven by 5% increase in conversion, 1% increase in traffic, 2.8% increase in average order value and 5.7% increase in orders.

The 22.2% increase in online marketplace revenues was driven by 12.1% increase in orders and a 9.2% increase in average orders value to $71 up from $65 last year. Now turning to margins, this quarter’s gross margin was 28.1% compared to 30.3% for the period last year.

This 230 basis point decline was primarily due to several factors including sales mix between sales channels and categories, competitive pricing strategies across our online sales channel and lower freight revenue as a percentage to total freight charges.

Our private label mix grew to 63% of net sales this quarter, compared to 60% last quarter and 58% in the most recent year. Our e-commerce online advertising expense, including catalog cost was 7.2% of net online sales this quarter, which is flat compared to both last year and last quarter.

We intend to strategically focus on optimizing spend across all acquisition sources. This quarter’s marketing expense excluding online advertising expense was 6.9% of net sales compared to 7.7% last year. This decline of 80 basis points was primarily due to lower depreciation and amortization expense related to timing of capital investments.

General and administrative expenses including amortization of intangibles was 4.2 million or 5.5% of net sales this quarter compared to 4.2 million or 6.2% of net sales last year, a decline of 70 basis points. The decrease was primarily due to lower wages and lower overhead costs.

Fulfillment expense was 6.6% of net sales this quarter down from 6.9% last year, a decline of 30 basis points. This improvement was primarily due to lower depreciation and amortization expense, reduced overhead expense from the closure of the Carson warehouse facility partially offset by higher wages.

Technology expense was 1.6% of net sales this quarter and flat compared to last year. As Shane mentioned earlier adjusted EBITDA for the quarter was 2.9 million compared to adjusted EBITDA of 3.4 million last year. Adjusted EBITDA excludes non-cash share based compensation expense of 477,000 this quarter and 376,000 for the first quarter of last year.

The difference between this year over last year can be summarized as, although we have strong top-line revenue growth and leveraged our operating cost as a percentage to total net revenue favorable against last year. The gross margin compression had a greater impact and was a driver of lower year-over-year adjusted EBITDA.

We believe our investment in our lifetime value customer initiatives in 2015 will improve our results overtime. I would now like to touch on our sales metrics for Q1 period. Unique visitors on our e-commerce site for the quarter were 30.6 million, up 1% over last year.

Orders placed through our e-commerce channel this year were 516,000 up 5.7% from last year of 488,000 with an average order value of $110, up 2.8% from the $107 last year. Our conversion rate was 1.69% this quarter, up 5% from last year's 1.61%.

We believe our strong growth and conversion and the increase in average order value are both due to improved user experience and competitive pricing.

Revenue capture defined as the amount of actual dollars retained after taking into consideration returns, credit card declines and product fulfillment improved by 60 basis points to 85.5% of gross sales compared to last year of 84.9% of gross sales. The revenue capture improvement is primarily due to lower sales returns and reduced out of stocks.

This quarter's customer acquisition cost came in at $7.30 compared to $6.96 last year and $7.46 last quarter. The reduction from the previous quarter was primarily due to leveraging our marketing expense efficiently as numbers of orders improved double-digit, while spend was up single-digit.

Now turning to the balance sheet, we ended the quarter with inventory of 48.3 million, an increase of 11.7 million or 32% greater than last year but flat to last quarter. The increase in inventory is primarily due to timing of our seasonal buy receipts to support our positive sales comp and increased demand of our private label product.

Cash and securities was 8 million and debt on our revolving line of credit was 9.5 million compared with 7.7 million in the cash and securities and debt of 11 million last quarter. CapEx for the quarter was 2 million compared to 1.1 million last year. Adjusted EBITDA less CapEx was a positive 900,000 for the quarter compared to 2.3 million last year.

As Shane mentioned, the Company is focused on several key imperatives that we believe will potentially help grow revenues, anticipate will improve and gain efficiencies in our margin, as well as improve the inventory productivity. We believe that this will allow us to achieve our goal of improving our profitability and our liquidity.

We have several initiatives which include but are not limited to, one, optimizing pricing through all channels of our business; two, focus on introducing new SKUs for assortment that we anticipate will improve both incremental sales as well as replacing SKUs with lower productivity and margin.

We'll be utilizing generally as our productivity metric to measure and enable us to focus on SKUs that provide incremental sales and better margins and three, improving the overall turn and productivity of our inventory assortments with an expected goal of increasing our profitability and generating cash.

We look forward to providing you an update on our next quarterly call on the progress we’ve made on these initiatives. Now with that operator, we’ll now open the call for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Jeff Martin of ROTH Capital Partners. Please go ahead..

Could you go into more detail about the life time value initiatives, specifically how far into the process you are and what the process entails any results you are seeing to-date and when you think that will reach the completion stage?.

Yes Jeff, this is Shane I will take it.

So we’ve -- it has certainly been a plan of ours since the start of the year as we’ve addressed sort of the issues of us being less dependant on organic search and it really led us to the position that we’ve got to drive LTV to be able to; one, have consumers come directly back to our sites; and two, be able to spend more money in marketing that again can control that consumer flow and that traffic in.

And while we’ve always been focused on LTV certainly you have heard us talk about more private label shifting and on the last call investments in that area, certainly you have heard us talk about increasing repeat purchase and the investments we’re making there as a management team we have solidified this as the operating goal for us to move forward with in 2015 you’re starting to see some of those results in the numbers themselves.

Our conversion was up. Our AOV was up. Our order count was up. So I think you are starting to see some of that progress move forward and we have just a number of initiatives inside driving both gross profit per unit that number of units, repeat purchase and conversion.

And hopefully by the end of the year you will start to see our marketing spend as a percent of revenue increase as a result as we’re driving more customer lifetime value to be able to put those dollars to work, driving more customers..

And then could you touch on the online marketplace, if there has been any changes I mean that is a constantly evolving channel for you just an update there would be helpful?.

Yes so it continues to be a channel that’s important to us both through Amazon, eBay and other emerging online marketplaces. We’re seeing that soften a little bit for us over sort of you can call two very aggressive growth years over the last two years.

But we continue to think that’s going to be a great channel for us going forward and a strong channel and it may have some as your point ups and downs but certainly a very strong channel for us and one that we think we can compete in because we have frankly the best supply chain in the industry when it comes to private label products and when you are starting on marketplaces you certainly have got to be the low cost leader to move products with that channel and we’ve proven that we can do that..

And then I just want to make sure I caught this right.

The life time value initiatives, you spent about 1.2 million marketing should generate 2.5% and in terms traffic 10 million in revenue and 1 million of EBITDA, I think is that right?.

Jeff let me give you that in more color, what we’re seeing there is if we could increase our LTV in year one by $1, that $1 would turn into some traffic, 2.5% increase in traffic that would probably turn into like $10 million in revenues and $1 million of EBITDA because we'll spend about another 1.5 million in marketing.

So I am hoping what you see from our business over the next period of time two years is an increase in our marketing spend because of the increase in LTV and again a number of initiatives around that; firmly centered around our ability to drive private label product; second, our ability to actually increase the basket size and as you increase the basket size obviously more GP dollars and the entire basket drop through.

So, that’s really about thinking about why are we pushing so hard on this initiative and the areas of that initiatives it really centers around our ability to drive $1, $2, $3 more dollars of LTV and then reinvest that back into business to drive more customers in..

Can you shed any insight into the tail off in the traffic that growth that you started to see at the beginning of the quarter and what headwinds if you could point to any that caused this pullback from the rate it was at the beginning of the quarter?.

Sure, we started the quarter up sort of mid single-digits. We were very excited about the traffic growth. We have consistently seen conversion growth but as that traffic growth came through, we were kind of clicking on all cylinders and quite excited about that.

The headwind frankly came in a macro shift that we saw on our top keywords where it’s shifted a little bit from e-commerce players to more media site or content players.

And so that mix shift had an impact also in the quarter and so we went from up positives and from a traffic perspective to run in a little bit negative and that’s actually continued into the second quarter. But then that effectively had worked its way into the second quarter as I just mentioned..

You’re still seeing the conversion rates higher though?.

Yes, we continue to see improved conversion. We continue to think we’ll be up single-digits for the year as I mentioned it on the call though the second quarter will clearly be our toughest quarter of the year based on some of the weather that happened last year and so we think we’ll see acceleration in the back half of the year..

The next question comes from Mitch Bartlett of Craig-Hallum. Please go ahead..

You talked about sales metrics quarter-to-date and you were just talking about it just a second ago.

But did you give kind of growth metrics for the quarter?.

For the first quarter Mitch?.

For the second quarter, just like quarter-to-date how you’re seeing the…?.

Yes, Mitch we’re slightly positive for the quarter we’ve seen a little bit of a ramp during the last week and we expect it to ramp more throughout the quarter. Again though I would mention the second quarter is obviously going to be our toughest quarter of the year..

And then, the private label and branded the private label at 63% of total sales, is that the highest level you’ve ever hit and what was the growth of private label and branded in the quarter, respectively?.

Yes so, branded was slightly positive in the quarter and private label was up similar to where it had been trending in the upper teens..

Very good quarter let me ask the interesting news in the past few months was one of your shareholders large shareholders and former CEO of the company put out a release basically suggesting the Company could be sold, any commentary on that?.

Well, we certainly appreciate all feedback from shareholders and welcome it. And we’re in agreement with Mitch you know is always the value of the business we do think we’re undervalued we’re certainly growing e-commerce business that’s put up a couple quarters of double-digit growth with positive free cash flow in an industry that’s doubling.

And so we like where we’re going with the business and as it relates to commenting specifically on the points around the acquisition obviously we wouldn’t do that. But I can assure you that our Board is always looking at our shareholders’ best interest and looking at all alternatives if presented..

There are no further questions at this time. I would now like to turn the call over to Neil Watanabe for closing remarks..

Thank you. I just wanted to thank everyone for joining the call today. As always, we’re available for any additional questions you may have so please don’t hesitate to call. Also, please note that we will be presenting at the B.

Riley & Company Conference in Los Angeles on May 12th and the Craig-Hallum Conference in Minneapolis on May 27th and hope to see some of you there..

This concludes today’s teleconference. You may now disconnect your lines. And thank you for your participation and have a pleasant day..